Quality Improvement and Profitability Objective Gagnon Company reported the following sales and quality costs for the past four years. Assume that all quality costs are variable and that all changes in the quality cost ratios are due to a quality improvement program. Quality Costs as a Year Sales Revenues Percent of Revenues $9,440,000 1 30% 2 10,240,000 27 11,840,000 23 4 13,140,000 19 Required: 1. Compute the quality costs for all four years. Quality Cost 2,832,000 Year 1 V 2,764,800 Year 2 2,723,200 Year 3 2,496,600 v Year 4 By how much did net income increase from Year 1 to Year 2 because of quality improvements? 307,200 By how much did net income increase from Year 2 to Year 3 because of quality improvements? 473,600 By how much did net income increase from Year 3 to Year 4 because of quality improvements? 525,600 2. The management of Gagnon Company believes it is possible to reduce quality costs to 3 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon 2,102,400 Is the expectation of improving quality and reducing costs to 3 percent of sales realistic? Yes 3. Assume that Gagnon produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was $200. In Year 1, total variable costs were $120.00 per unit. In Year 3, competition forced the bid to drop to $160.00 Do not round the intermediate calculations and round your final answers to the nearest dollar. Compute the total contribution margin in Year 3 assuming the same quality costs as in Year 1. Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3 What is the increase in profitability resulting from the quality improvements made from Year 1 to Year 3? Quality Improvement and Profitability Objective Gagnon Company reported the following sales and quality costs for the past four years. Assume that all quality costs are variable and that all changes in the quality cost ratios are due to a quality improvement program. Quality Costs as a Year Sales Revenues Percent of Revenues $9,440,000 1 30% 2 10,240,000 27 11,840,000 23 4 13,140,000 19 Required: 1. Compute the quality costs for all four years. Quality Cost 2,832,000 Year 1 V 2,764,800 Year 2 2,723,200 Year 3 2,496,600 v Year 4 By how much did net income increase from Year 1 to Year 2 because of quality improvements? 307,200 By how much did net income increase from Year 2 to Year 3 because of quality improvements? 473,600 By how much did net income increase from Year 3 to Year 4 because of quality improvements? 525,600 2. The management of Gagnon Company believes it is possible to reduce quality costs to 3 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon 2,102,400 Is the expectation of improving quality and reducing costs to 3 percent of sales realistic? Yes 3. Assume that Gagnon produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was $200. In Year 1, total variable costs were $120.00 per unit. In Year 3, competition forced the bid to drop to $160.00 Do not round the intermediate calculations and round your final answers to the nearest dollar. Compute the total contribution margin in Year 3 assuming the same quality costs as in Year 1. Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3 What is the increase in profitability resulting from the quality improvements made from Year 1 to Year 3
